Foreign Direct Investment, Business Start-up Regulations, and Entrepreneurship in Africa

This paper investigates how foreign direct investment (FDI) and its interaction with business start-up regulations affect entrepreneurship in a sample of African countries. Preliminary findings obtained from longitudinal data analysis suggest that the complementarity between FDI and entrepreneurship (measured by new business creation) significantly depends on the existing regulatory environment for business startups. More specifically, the results show that FDI significantly crowds-in new domestic firms when business start-up regulations are lower. In other words, excessive startup regulations are inefficient, and thus dissuade new firm creation by increasing the costs of doing business and impeding the crowding-in effect from FDI in domestic product and labor markets, as well as in foreign markets. From a policy standpoint, reforms to establish the level of regulation that is most beneficial for the successful entry of new local firms can therefore play a critical role in enhancing the complementarity between foreign and domestic enterprises. These reforms will not only increase the entry of new domestic firms, but will also generate positive externalities from FDI which arise from transmission of new ideas, entrepreneurial skills, and other knowledge transfers and lead to higher productivity and growth.